Measurement of interest rate risk

We use different methods to measure the interest rate risk.

  1. effective duration for small parallel shift

  2. convexity adjustment for large parallel shift

  3. key rate duration for nonparallel shift

Is that correct?

Perhaps add spread duration to measure reactions to changes in the spread between a credit risky issue and a risk free treasury, and present value distribution of cash flows also for reactions to non parallel shifts in the yield curve.

And yes, what you’ve written above looks pretty much correct to me…

Thanks a lot!